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Modified Internal Rate of Return


Overview of Modified Internal Rate of Return
The modified internal rate of return is one of the many methods that are used for the purpose of capital budgeting. It could be described as a financial measure. The modified internal rate of return is used extensively by a variety of business firms.

Use of Modified Internal Rate of Return
The modified internal rate of return is important in the context of the capital budgeting done by various companies.

Relationship with Internal Rate of Return
The modified internal rate of return is a modified version of the internal rate of return. However, it is not entirely similar to the internal rate of return. Unlike the internal rate of return the modified internal rate of return takes into account the rate of investment of the cash flows that are not negative. It makes precise assumptions about these when functioning in the context of corporate finance.

Assumptions of Modified Internal Rate of Return
The modified internal rate of return makes the following assumptions:
  • The entire amount of cash flow that is positive is invested again. This investment is normally made at the weighted average cost of capital in a particular year when the project is supposed to be concluded.
  • The total number of negative cash flows is admitted in the first investment outlay.
  • Each cash flow that is not positive is discounted.


Basis of Ratings made by Modified Internal Rate of Return
The modified internal rate of return ranks the effectiveness of a particular business undertaking. This rating is made on the basis of the present worth ratio of the particular project itself. The present worth ratio is a type of NPV or Discounted Negative Cash Flow.
Importance of Modified Internal Rate of Return
The modified internal rate of return is of utmost importance in the context of present day financial studies.
Equational Representation of Modified Internal Rate of Return
Following is the numerical presentation of modified internal rate of return:

MIRR = (- NPV( reinvest_ rate, positive_values[1,2,...., i] ) * (1 + reinvest_ rate)n/NPV(finance_rate, negative_values[1,2,...j] ) * (1+ finance_rate))1/ n-1 - 1

In this formula n = i + j

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Last Updated on : 27th June 2013

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